This Week’s Developments in the US Economy

We’re not There Yet: Emerging Cracks and the Potential Implications for Rates

Nearly two years into the Fed’s rate hike cycle, the message from Fed members remains the same: we’re not there yet. With meaningful implications for real assets—both from the perspective of liquid capital markets and impending loan maturities—higher for longer has become the reality that many doubted throughout this cycle. As markets expect rates to remain high in the first half of 2024, we see meaningful implications as approximately 20% of the $4.7 trillion in outstanding commercial real estate debt is set to mature this year.

While several Fed members, including Chair Powell, have been fairly consistent in suggesting that rate cuts could come at some point this year, some emerging cracks may accelerate that process if they develop into broader concerns. Rising consumer debt and delinquencies could challenge an otherwise positive economic outlook, highlighted this week by the Fed’s Beige Book, which noted normalizing economic conditions with some softening observed in consumer activity.

Overall, while we see economic tailwinds continuing to exceed rising headwinds, the latter has the potential to increase the argument for a shift in rate policy. We see the case for cuts starting mid-2024. Below we look at why.

Can 2023’s Economic Strength Continue in 2024?

US economic growth exceeded expectations in 2023, avoiding persistent calls for a recession, and establishing positive momentum for the first quarter of the year. Despite challenges like high interest rates and rising consumer debt, the outlook remains cautiously optimistic, supported by a strong labor market and steady consumer spending.

The US economy expanded by 2.5% in 2023, outperforming both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development’s (OECD) projections, and surpassing growth rates of many global peers. Fourth quarter growth finished the year at 3.2%, with year-end figures revealing a rise in fixed investments, consumer, and government spending. This indicates stronger domestic demand than initially anticipated at year-end, bolstering an optimistic outlook. Other short-term indicators highlight an expanding economy, with Composite, Services, and Manufacturing PMI figures all posting figures above the threshold of 50 on the index, signaling a continued expansion in the economy.

For 2024, growth will likely benefit from two main drivers: a strong labor market and sustained consumer spending. The labor market remains robust, with the number of hires exceeding the post-GFC average, and layoffs staying stable and below historical averages. This stability has kept the unemployment rate around 3.7%, and we will see an update with this Friday’s BLS Jobs Report. Wage growth also continues to be strong, with a 5% increase year-over-year in January 2024, according to the Atlanta Fed, outpacing the post-GFC average of 2.7%. While this labor market vitality supports consumer spending and ongoing consumer resilience and is likely to be bolstered by steadily declining inflation, we see cracks emerging ahead.

Consumer Debt: An Emerging Crack but Not Yet a Catalyst for Policy Shifts

Increasing US consumer debt levels are flashing warning signals. Overall US credit card debt has increased by 14.5% year-over-year, reaching $1.1 trillion in Q4 of 2023. Delinquent credit card balances have also seen an alarming uptick, with new delinquencies reaching 8.5% for balances of 30 or more days and 6.4% for balances of 90 or more days. Credit scores, which have risen for well over a decade, fell for the first time according to FICO. The firm also found that over 18% of borrowers overall had more than a 30-day past due missed payment against credit accounts, up from 16.5% a year earlier.

While our focus on the Fed’s rate hike cycle has typically been on the implications for real assets, we believe that we are starting to see increasingly negative effects on consumers—particularly those relying on revolving credit. This is likely to have knock-on effects for consumers, and, combined with increasing price sensitivity, may contribute further to moderating consumer activity. This may be one of the long and variable lags of monetary policy impacts that initiates a shift in policy. But, again, we’re not there yet.